[Rocky]

Guys please can you explain me the difference of realized and recognised gain.

If for instance somone inhereted a real property and next year after some capital improvements that person sells the property. How would we define realized and recognise gain here ?
Lets say inheritance value fmv 50k
Nbv when property purchased 10 years ago was 30k
Improvement 10k
Basis will be 50+10 60k
Sold next year 100k
40k gain. Now where is realized gain and recognised gain here.
Also how to account for depreciation in the year sold ?

[Anonymous]

The answer to your particular question depends on whether the executor decides to elect the alternate valuation method or not. If not, then the basis of the inherited property will be its FMV at the date of the decedent's death, thus the gain realized AND recognized will be 50K (100K-50K). If the executor decides to use the alternate valuation date, then the basis of the inherited property becomes the FMV on the alternate valuation date, which is 6 months after the decedent's death or the date the executor distributes the inherited property, whichever is earlier. The realized gain means the transaction actually happened in real life, and the recognized gain is the gain that's actually reported on the tax return. I hope this helps.

[Rocky]

so based on these numbers realized gain and recognize gain would be same ? Why you did not take into account improvement done on the property after inheritance of 10k, this must be added to the basis. I understand the alternative valuation method, that is fine to me. I am stuck with REALIZED AND RECOGNIZE ALWAYS. Further how can we account depreciation charge here, can you help with this as well ?

[Anonymous]

I didn't include the improvement of 10K in the NBV of the inherited property because you already stated that the FMV of inherited property at the decedent's date of death is 50K (assuming the executor didn't elect the alternate valuation date). Also, you just need to know when to realize and recognize gain in the context of:

1) Homeowner's exclusion
2) Involuntary conversion
3) Divorce property settlement
4) Exchange of like-kind (business)
5) Installment sale
6) Treasury capital and stock

In each of these categories, there is a rule when to REALIZE and RECOGNIZE the gain. Your review course should cover these. Without learning the exceptions, it's going to be difficult to understand the difference between realized and recognized gain.

[Author]

Replies